Traders prefer forex because of the size of the assets market, a huge variety of currencies to trade with, versatility of volatility, fewer transaction costs, and complete accessibility during the week.
The goal for each trader is to increase revenue during the time, increase annual profit.
What is compounding in finance?
Compounding represents accumulated percentage increase over time as an exponential function. For example, if you have $1000 and you can increase your money by 6% each month, you will double your money each year, and you will have more than a million dollars after 10 years.
Now let us see what is compounding in the forex industry.
What is forex compounding?
The forex compounding plan represents the money management technique where traders change investment size through accumulation and reinvestment of forex trading profits from the past trades over a period of time.
If you have $10000 and you use 1 mini lot average position size, you need to increase the average position size during the time as your portfolio grows.
Forex compounding plan example:
In the first step, the trader needs to create a portfolio and decide what amount of money he or she will invest in which assets. You can open multiple trading accounts for each type of asset separately (account to indices, account for forex, account for metals, etc. )
Define risk tolerance
In the next step, risk tolerance needs to be defined.
I can risk 1% per trade at most, 2% risk maximum risk at any moment (all open trades). In this case, the maximum portfolio drawdown (usually) will be less than 15% at any time (this number is my empirical number from my experience).
Forex compounding plan – position size
In the next step forex compound plan can be made like in the Table below:
|Forex compound plan treshold||Average Position size||Maximum portflio risk for all open positions|
As we can see your risk is smaller as you increase revenue in your portfolio. More money in the portfolio means higher funds protection and position size risk decrease.
Forex compounding plan strategies
Trading and investment require exceptional dedication of hours and constant practice along with the virtues of patience. By diversifying and enhancing portfolios and gaining profit from specific asset strategies, traders can enhance and enrich their personal profiles. Regardless of being a beginner or proficient in Forex trading, the traders need to be disciplined and perform better in the international market for currency exchange. Another way to engage trading skills and build a commendable portfolio is through the act of Forex compounding. It is an ideal approach to generate a steadfast and dependable trading structure that will invite large-scale profit and returns on investments. Traders are encouraged to build a program to compound the required profit to the investment portfolio. This is highly valuable and productive for those who have just stepped into the world of Forex trading and are looking for potential Growth as a post to their basic account. A drastic and exponential growth can be observed if the compounding Forex approach is utilized, making the investments look richer and full of growth. Most of the Forex accounts rise slowly in a linear trajectory, but Portfolio growth can experience exponential positive effects to Forex compounding.
Having a compounding account relates directly to excessive profits. There is more than one way to generate profit through Forex trading, but you should have a systematic and scientific approach if you opt for a compounding account. Contrary to the idea of compensating loss by taking on the next step with a heavier investment, compounding phonics strategy advice is the traders to depend on pips. It does not involve waiting and adding increased investment per point to the trading cycling to compensate for losses. Rather, compounding is all about scientific trading strategies that are operational through positive pips over time irrespective of the position and size of the trade. For example, if all your trade positions are at a 1 standard lot over time, then there is a high chance of garnering profit over the trading. You can change or alter positions to compensate for the previous losses, but it will only provide you temporarily monetarily profit but would not ensure measuring total pips gain. Compounding is directly associated with positive pips and having a positive net pip is the chief idea behind a compounding Forex account. In addition to the net positive pips having an operational system with a great success rate above 51% is a significant requirement. The traders need to be efficient in accumulating profit and success, analyze the entry point to the exit. The expected success rate of traders for compounding accounts needs to be more than half of conception.
If traders achieve this condition, they can use the lever is provided to them by the Forex marketplace. However, this leverage needs to be used successfully and wisely as otherwise, all the extra effort will go to waste. If the traders acquired the two fundamental requirements, including the net positive path and success rate of more than 51%, then you can perform minimal alterations, which include shifting the workflow and assessing trading actions to percentages. The percentages can be measured according to the two ending points. Traders can protect and analyze the exact percentages through this perspective and profit expectation.
Forex traders should aim to build a sustainable structure that will assist them in the expected return on investment. Compounding for this account is a proper money management platform that aims to optimize profit by deemphasizing losses by bearing them with the next profit. Under compounding account, traders exponentially grow their assets except for time, profits, and losses. A small amount of money is placed in the account, which is used in future investments. This investment amount will double due to the estimated profit, and then this amount can be withdrawn when it reaches the threshold amount. If you are not in favor of withdrawing that amount, and that amount can also remain in the account completely, or you can take out a percentage from it.
As traders, it is imperative to frequently analyze and review trading strategies, techniques and gain additional knowledge to discipline and monitor yourself. Regardless of the platform you use, the investment will be directed to you at the end of the day. Most of the successful traders and experts use the process of compounding to double their profit for the next investment. However, unrealistic profit goals and thresholds will instantly plummet your expectations; therefore, setting convincing goals and logical thresholds, especially for beginners, is important. Setting more than 20 to 30% of the profit expectation is near unrealistic.
In addition to the profits, the traders need to be mindful of the existing gains and losses they might encounter. In the end, it is all about the strategies and techniques you adopt and how you carry yourself in the discipline to initiate Forex trading; begin by finding an online forex broker.